# Payback Period Questions And Answers Pdf

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Under payback method , an investment project is accepted or rejected on the basis of payback period.

## Accounts and finance

Question: Although the net present value NPV and internal rate of return IRR methods are the most commonly used approaches to evaluating investments, some managers also use the payback method. What is the payback method, and how does it help managers make decisions related to long-term investments? The payback period , typically stated in years, is the time it takes to generate enough cash receipts from an investment to cover the cash outflows for the investment. Managers who are concerned about cash flow want to know how long it will take to recover the initial investment. The payback method provides this information.

## payback period questions and answers pdf

Chapter 8. Solutions to Questions and Problems 1. This answer does not make sense since the cash flows stop after eight years, so again, we must conclude the Payback period is never 3. Question , Solutions , Chapter , Problem , Payback , 8 solutions to questions and problems , Solutions to questions and problems. Link to this page:. To find the crossover rate, we subtract the cash flows from one project from the cash flows of the other project. Here, we will subtract the cash flows for Project B from the cash flows of Project A.

In the Study Guide for Paper FFM, reference E3 a requires candidates to not only be able to calculate the payback and discounted payback, but also to be able to discuss the usefulness of payback as a method of investment appraisal. Recent Paper FFM exam sittings have shown that candidates are not studying payback in sufficient depth or breadth to answer exam questions successfully. This article aims to help candidates with this. Candidates should note that payback is not only examined within the Paper FFM syllabus, but also the Paper F9 syllabus. From the definition, it can be seen that only cash flows should be included within the calculation — specifically, only relevant cash flows should be included within the calculation, so items such as depreciation should be excluded. Depreciation will be on a straight line basis over the life of the project.

(i) Pay-back period (ii) Net Present Value and (iii) Internal Rate of Return. Solution: (i) Payback Period: Initial outlay. = Rs. 40, Cashflows for 5 years.

## Payback and discounted payback

The payback period is the time it will take for a business to recoup an investment. Consider a company that is deciding on whether to buy a new machine. Management will need to know how long it will take to get their money back from the cash flow generated by that asset. The calculation is simple, and payback periods are expressed in years.

Original Investment. The calculation of the payback period depends on the uniformity of annual cash flows. When annual cash flows are not equal i. When annual cash flows are equal, or in other words the company is receiving an annuity, the calculation of the payback period is straightforward: divide the original investment by the annual cash flow.

Discounted payback period is a variation of payback period which uses discounted cash flows while calculating the time an investment takes to pay back its initial cash outflow. One of the major disadvantages of simple payback period is that it ignores the time value of money. To counter this limitation, discounted payback period was devised, and it accounts for the time value of money by discounting the cash inflows of the project for each period at a suitable discount rate.

Updated on Jan 05, - PM. Capital Budgeting is one of the main functions in finance management. This uses various techniques to assist management in selecting one project over another.

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